Mosler Seminar/ Response to Nell comments

[Warren Mosler <mosler@xxxxxxxx>]

Responses below:

EJNell@xxxxxxx wrote:

> Dear Warren,
>
> Here are some preliminary notes on your paper, 'A General Analytical
> Framework..' which I like a lot.  I think it is developing nicely, and

> presents the general argument with great clarity and force.
>
> I'll follow these with some detailed comments - but I may be working
with an
> outdated versaion - mine is dated April 23.  Is there a later version?

>
> Edward
>
> NOTES ON WARREN?S ?GENERAL ANALYTICAL FRAMEWORK?
>
> Edward J. Nell
>
> These comments refer to the Draft of April 23, of which I have a
printed copy.
> I don?t have a more recent version.
>
> General remarks
>
> 1.      The presentation is admirably clear and concise - but
sometimes risks being
> too concise.  For readers not familiar with the point of view, steps
in the
> argument could sometimes be spelled out more fully
>
> 2.      The analogy between corn and currency is nicely done and fills
out the
> presentation at the New School.  But I think the difference should be
> mentioned also, since its implications are important: corn moving down

> vertically is exchanged item for item - privately, on the market - for
labor
> and other resources moving up; or put another way, corn exchanges for
money,
> money exchanges for labor and other resources.  In each case the
exchanges are
> item for item, each parcel of corn is paid for individually, as is
each hour
> (or day or week, etc.) of labor.  But while State-issued currency
flowing down
> exchanges for goods and services needed by the State flowing up, item
for
> item, State production of goods and services flows down and taxes flow
up, and
> the latter flows are independent of each other. Taxes don?t pay for
specific
> State services.  Many State services are provided to citizens who pay
no
> taxes.  Many (most?) State services are provided to everyone in
general, and
> sometimes we are not even aware of them - defense, police protection,
border
> patrol, Coast Guard, R & D, various kinds of regulation.  Others like
> education, and highways, are consumed on specific occasions, but they
have
> positive externalities - that is we all benefit from more people using
the
> services.  But they are still not bought item by item.  Citizens do
not obtain
> currency by selling to the State and then use it buying services from
the
> State; instead they obtain currency from transactions with the State
and use
> it to pay the tax obligations created by the State - while the
services of the
> State are available in many cases free, or for charges that don?t
cover the
> costs.

Let me try and fit this thought into the model.  With the farmer, his
commodity, corn,
flows downto 'hungry' consumers in return for what he demands (usually
units of a
currency).  What he then
does with his currency is 'his business' and certainly worthy of
discussion.

With the state, its commodity, units of the currency, flows down to
taxpayers in return
for what the state
demands (usually goods and services, but sometimes other currency, as
when the central
bank buys
foreign exchange).  What the state then does with the stuff it gets is
'its business'
and most certainly worthy
of discussion!

Does this help?

>
>
> 3.      The powers attributed to the State need to be spelled out and
qualified.
> The picture sketched is surely correct for the US, the UK, France,
Japan, etc.
> That is, in these countries the State is sovereign, it is the
unchallenged and
> legitimate authority over the people and the economy of a region, so
that it
> has a monopoly of force, which it is capable of using efficiently.  It
can
> command the information it needs, and can command the skills and
resources to
> act on that information.  The State may be constrained in various
areas of
> possible activity by a Constitution or by laws, convention and
history; but
> these are political constraints.  Were such constraints to be lefted,
as in
> wartime, the State would be able to command the resources to act in
those
> areas.
>         Evidently this is not the case with Russia today.  The State
cannot be said
> to be the sovereign and unchallenged authority; it cannot effectively
impose
> and collect taxes.  It cannot command resources.  Therefore it cannot
impose a
> currency by fiat, and, indeed, other currencies - dollars, Dms -
circulate
> widely in certain areas.   Nor perhaps does  the State hold
unchallenged
> sovereignty in other former Eastern bloc countries, or in many African

> countries. It is doubtful if  the State holds such a position in
Colombia, or
> even Mexico.  It probably does in at least some of the Asian countries
-
> though some have suggested that it may crumble in Indonesia.
>         The ability of the State to impose and collect taxes depends
on the ability
> and honesty of the State bureaucracy, on the availability of
information
> (record-keeping), on the effectiveness of the police and the
efficiency of the
> courts, and so on.  But if the State cannot impose and collect taxes,
it
> cannot develop a skilled and honest and effective bureaucracy - a
catch-22.
>

Very true.  I would only first restate slightly:  The state must impose
taxes and that
these must then generate sellers of goods and services who desire that
which is
necessary to pay
taxes (the state's currency).  Once things are for sale in the state's
currency it can
go ahead
and buy them, regardless of tax collections.

But we are really saying the same thing.  A tax driven currency is only
as good as the
taxing authority,
by definition.  Actually, Russia does collect a lot of tax.  There is
some income tax,
but quite a bit
of collected taxes comes from various royalties and duties, and a
relatively new vat.
But clearly collection
has dropped in recent years.  Of course, one explanation is that they
can't collect
what they don't spend,
and spending has been cut due to lower revenues.  Kind of a downward
spiral of sorts.
This is to comply
with IMF mandates.  They are caught in a 'hopeless' trap.  The result
has been somewhat
of a lose
policy to index the local currency to the dollar.  The cb supports the
currency, via
purchases vs $US,
which are supplied by royalties on exports and of course the IMF, which
also mandates
the impossible
fiscal stance.

But there is a larger point.  Whatever taxes are effective can of course
be used to
generate as many real
goods and services as the state desires, simply by reducing what it pays
when it
spends.  This is not usually
a viable political option, however!

> 4.      Suppose a country with a weak State has to import an essential
goods which
> is widely used.  (Historical examples: countries in the Sterling Area,
Europe
> and the dollar immediately after WWII.)  Obtaining the currency with
which to
> buy that import will be a major economic objective - everyone will try
to earn
> that currency, which will then tend to circulate in the country, as
dollars do
> in Latin America and Russia.   The essential and widely used import
stands in
> the same relationship to the economy as taxes do in a country with a
strong
> State and a large government.  Of course if the State consolidates its

> position and becomes stronger, this will change.
>

Yes.  Often more than one currency is desired.  Paul Davidson uses the
example of Korea
in the early 50's.They need won to pay local taxes, so they circulated
some.  But they
also desire US military script, as
it bought things in the PX.  Paul pointed out that the script
transactions dominated,
but the won still was
used.

If the state can use its tax driven currency to get the real goods and
services it
wants, does it care what else
the population uses?

> More detailed comments to follow - is there a later draft of the
paper?

  On my website:  http:www.warrenmosler.com

Warren